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Ross v. Abercrombie & Fitch Co.

October 5, 2006

ROBERT ROSS, INDIVIDUALLY, AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
ABERCROMBIE & FITCH COMPANY, ET AL., DEFENDANTS, AND DANIEL TAUBENFIELD, INDIVIDUALLY, AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
ABERCROMBIE & FITCH CO., ET AL., DEFENDANTS, AND THE BOOTH FAMILY TRUST, BY CHARLES FEDERMAN, TRUSTEE, DERIVATIVELY ON BEHALF OF NOMINAL DEFENDANT, ABERCROMBIE & FITCH COMPANY, PLAINTIFF,
v.
MICHAEL S. JEFFRIES, ET AL., DEFENDANTS, AND STANLEY SVED, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
ABERCROMBIE & FITCH CO., ET AL., DEFENDANTS, AND GORDON TAYLOE, INDIVIDUALLY, AND ON BEHALF OF A CLASS OF PERSONS SIMILARLY SITUATED, PLAINTIFF,
v.
ABERCROMBIE & FITCH CO. ET AL., DEFENDANTS, AND PO LEUNG CHEUNG, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED PLAINTIFF,
v.
ABERCROMBIE & FITCH CO., ET AL., DEFENDANTS, AND KAREN E. GRAHAM, INDIVIDUALLY, AND ON BEHALF OF A CLASS OF PERSONS SIMILARLY SITUATED, PLAINTIFF,
v.
ABERCROMBIE & FITCH CO., ET AL., DEFENDANTS, AND ROBERT KEMP, PLAINTIFF,
v.
RUSSELL M. GERTMEIAN, ET AL., DEFENDANTS, AND ALFRED FREED, DERIVATIVELY ON BEHALF OF ABERCROMBIE & FITCH CO., PLAINTIFF,
v.
MICHAEL S. JEFFRIES, ET AL., DEFENDANTS, AND JENNIFER CHU, INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF ABERCROMBIE & FITCH CO., A DELAWARE CORPORATION, PLAINTIFF,
v.
RUSSELL M. GERTMENIAN, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Terence P. Kemp United States Magistrate Judge

JUDGE SARGUS

ORDER

Six of these ten consolidated cases are private securities class actions governed by 15 U.S.C. §78u-4. The plaintiffs in those cases have requested that the Court lift the stay of discovery provided for in 15 U.S.C. §78u-4(b)(3)(B) in order to permit the plaintiffs to obtain documents which either have been or will be produced by the defendants to the SEC as a result of a formal SEC investigation of the same circumstances described in the class action complaints. Supporting, opposing, and reply memoranda have been filed, and defendants have also filed a statement of supplemental authority citing two additional decisions supporting their position on the issue. For the following reasons, the motion for a partial lift of the stay of discovery will be denied.

15 U.S.C. §78u-4(b)(3)(B) provides as follows:

(B) Stay of discovery

In any private action arising under this Chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.

Although no motion to dismiss is pending, the cases are in a substantially equivalent posture because it is the defendants' intent to move to dismiss the amended complaint which was filed on August 14, 2006. Thus, tracking the language of the applicable statute, the question for the Court is whether the plaintiffs have, by demonstrating that there is a formal SEC investigation of the same facts and circumstances and that defendants will be producing documents to the SEC in connection with that investigation, shown "that particularized discovery is necessary to preserve evidence or to prevent undue prejudice" to the plaintiffs.

Not surprisingly, this issue has arisen repeatedly in the context of private securities litigation because it is not an unusual occurrence that one or more governmental agencies, including the SEC, will be conducting a similar investigation into the facts which led the private plaintiffs to file a class action complaint. Moreover, the district court decisions on this issue are fairly evenly split, with some courts ruling in favor of a partial lifting of the stay to permit the plaintiffs to have access to the same documents being produced to the governmental agencies, and others concluding that such a lifting of the stay cannot be reconciled with the language of §78u-4(b)(3)(B).

Plaintiffs rely heavily on In re Firstenergy Corp. Sec. Lit., 229 F.R.D. 541 (N.D. Ohio 2004). In that case, the Court noted that a split in authority existed, but concluded that the facts presented by the plaintiffs made that case similar to In re WorldCom, Inc. Sec. Lit., 234 F.Supp. 2d 301 (S.D.N.Y. 2002), a case in which partial relief from the stay had been granted. The Court concluded that, like the plaintiffs in WorldCom, the Firstenergy plaintiffs would be "unfairly disadvantaged in pursuing litigation and settlement strategies" if they were not given access to the documents produced to the government, and therefore granted partial relief from the stay. Id. at 545.

Having reviewed the cases cited by both parties, the Court concludes that the appropriate method of analysis involves, as its starting point, the language through which Congress chose to express its intent that private securities cases not involve unbridled discovery from the outset. Although both sides have cited legislative history and Congressional intent concerning the reason that such language was included in §78u-4(b)(3)(B), Congress's choice of words should control the issue unless the words chosen are ambiguous. Here, the Court does not believe that any ambiguity exists.

First, Congress did not decree that discovery would be permitted in private securities cases if certain circumstances arose which would make the discovery either less burdensome to the defendants than ordinary discovery or, perhaps, not burdensome at all. Rather, the focus of the statutory language is on the need either to preserve evidence in the case (presumably because, if the discovery were not permitted, such evidence would be destroyed) or to prevent undue prejudice to the plaintiff. The extent to which the requested discovery would burden, or not burden, the defendants is not the subject of the pertinent statutory language.

Second, the Court notes that in this case, there is no argument advanced that the lifting of the stay is necessary to preserve evidence in the sense in which that phrase is typically used in litigation. Ordinarily, a party is permitted to take discovery under circumstances where discovery is not otherwise permitted in order to preserve evidence only if there is a real possibility that, without the discovery, the evidence will be irretrievably lost. For example, a person who has pertinent testimony to give may be on the verge of departing the country to a locale where a subpoena cannot be served or, in many cases, may be seriously ill and might die before his or her testimony can be taken. Less frequently, discovery might be needed in order to preserve documents from destruction or to preserve some piece of tangible evidence which is at risk of being destroyed either through the actions of another party or through the passage of time. There is no suggestion here that any of the evidence which the defendants are being asked to provide to the SEC falls into these categories, and the Court does not believe that a showing has been made that lifting the stay is necessary in order to preserve evidence.

That leaves only the question of whether the Court should lift the stay in order to prevent undue prejudice to the plaintiffs. The plaintiffs have argued that they will be prejudiced in this case because, like plaintiffs in many of the cases they cited, and as the Court observed in the Firstenergy case, they would be "unfairly disadvantaged in pursuing litigation and settlement strategies" without the evidence. Certainly, any party who is deprived of discovery which would enable that party to formulate either a litigation or a settlement strategy can be said to be disadvantaged in pursuing those strategies if the Court denies discovery to that party. Thus, there is a real possibility that in every securities case, the stay provided for in §78u-4(b)(3)(B) will work some prejudice on the plaintiffs. Congress was undoubtedly aware of that fact. Consequently, the modifier "undue" was inserted before the word "prejudice" in order to stress that lifting a stay of discovery must be premised upon some showing of prejudice which is above and beyond the prejudice which a party suffers simply from being denied access to discovery materials early in a case.

A number of the decisions cited by plaintiffs justify the lifting of a stay in order to present some unique type of prejudice which would result if the plaintiffs were not given access to documents being produced to the government. Most often, the issue arises in the context of what the WorldCom court described as a quickly-shifting landscape where numerous governmental and private parties are pursuing administrative or litigated remedies against the defendant even to the point of settlement, leaving the private class action plaintiffs as the only parties who lacked sufficient access to information to protect their own interests. That is simply not the situation here. There is no suggestion that any settlement is on the horizon with either the SEC or other groups of plaintiffs who are not subject to the same disadvantage as the plaintiffs in this case. This does not appear to be a quickly-moving landscape or one which involves imminent resolutions of claims or the filing of other proceedings, such as bankruptcy, which will have a significant impact upon the plaintiffs' ability either to pursue their rights through litigation or to obtain a recovery. Rather, this appears to the Court to be a "garden variety" case where the only thing which has happened, apart from ...


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